Shadowing top mutual funds is one approach to finding stock ideas. There are many ways to do that. Here is one that identified 12 stocks that are held by at least 10 of 30 top diversified, U.S. domestic equity mutual funds.
Filter Criteria For Top Funds:
First, how did we define a "top" fund for this exercise? The 30 funds met these criteria (through November 30, 2011):
- U.S. domestic stock funds, excluding specialty funds
- Current Morningstar rating 4 or 5 stars (historical view)
- Current Morningstar risk rating "average" or "low" (historical view)
- 3-Year Morningstar rating 4 or 5 (historical view)
- Morningstar rating gold or silver (pro forma view)
The historical ratings are 1-5. The risk ratings are low, below average, average, above average and high. The pro forma ratings are negative, neutral, bronze, silver and gold.
After eliminating multiple share classes for portfolios, there are 30 mutual funds that survive the filter.
Filter Criteria For Key Stock Cross Holdings:
We arbitrarily defined a key cross holding as a stock held by at least 10 of the 30 funds (1 in 3 ). There are 12 stocks that met that criterion.
That doesn't mean they are necessarily good ideas or suitable for your purposes, but it qualifies them for a closer look, based on whatever criteria you use in your individual stock selection.
Being in that list just means that at least 10 research and portfolio management teams of funds that have done well and are expected to do well, and have decided that those stocks are worth holding.
That list is shown in the table image that follows, along with some price versus moving average prices and shorter moving averages versus longer moving averages.
SPY (representing the S&P 500) is included in the table, as a benchmark reference.
The 12 stocks (along with the StarMine rating by Thompson Reuters) are:
- MSFT - Microsoft (7.5)
- PEP - Pepsico (6.2)
- IBM - International Business Machines (8.5)
- CVX - Chevron (9.8)
- GOOG - Google (4.8)
- WFC - Wells Fargo (5.9)
- BBBY - Bed, Bath and Beyond (8.7)
- ORCL - Oracle (8.0)
- AXP - American Express (5.4)
- UTX - United Technologies (8.6)
- UPS - United Parcel Service (5.0)
- JNJ - Johnson & Johnson (7.5)
The StarMine rating scale is 0.1 through 10.0 (the scale suggests that values over seven are bullish, and over nine are very bullish).
An excerpt for the explanation of the StarMine rating is as follows:
It is calculated by normalizing third-party research providers' ratings distributions ... and weighting each provider's rating in the final score based on historical accuracy. Scores for the 1,500 largest stocks by market capitalization are force ranked to help ensure a consistent ratings distribution.
Click image to enlarge
The color coding is binary. Green shading means the value in a cell is greater than the value for that column for SPY, while pink shading means it is equal to or less than the SPY value.
The first three columns of data are the price divided by the moving average price for 3, 6 and 12 months. The next four columns are the shorter moving average divided by a longer moving average. The 1-day moving average is the last price.
Even if you are not participating in the equity market at this time, due to various macro issues, it is still a good time to be window shopping for investment ideas to implement when you think the time is right. This list along with others we have published recently may be helpful to you in your research.
Disclosure: QVM does not have positions in any mentioned security as of the creation date of this article (December 11, 2011).
Disclaimer: This article provides opinions and information, but does not contain recommendations or personal investment advice to any specific person for any particular purpose. Do your own research or obtain suitable personal advice. You are responsible for your own investment decisions. This article is presented subject to our full disclaimer found on the QVM site available here.